GLOBAL ECONOMY-World economic recovery struggling to gain traction

* China PMI dips to 7-month low

* Euro zone PMI retreats from 31-month high

* U.S. regional factory survey falls, national index rises

By Jonathan Cable and Steven C. Johnson

LONDON/NEW YORK, Feb 20 (Reuters) - Another month of slower
factory activity in China and a sharp decline in a closely
watched gauge of U.S. manufacturing on Thursday added to concern
about the state of the global economy.

Surveys also showed business activity across the 18-country
euro zone slowed this month, confounding expectations of an
acceleration.

U.S. stocks edged higher, however, as investors continued to
shrug off tepid data while stocks in Europe recouped earlier
losses, though sentiment remained fragile.

Investors were also concerned about minutes of the Federal
Reserve's most recent meeting, released on Wednesday, which
showed the U.S. central bank was set to keep winding down its
stimulus spending despite recent softer economic data.

"While we expect the recovery to continue during the course
of this year, the market remains volatile in the near-term as
investors are nervous on the back of the U.S. tapering story,"
Henk Potts, equity strategist at Barclays Wealth, said.

Fears that the U.S. economy had lost some momentum in the
new year after a strong finish to 2013 were reinforced by a
decline in the Philadelphia Federal Reserve Bank's business
activity index to -6.3 from 9.4 in January. A reading above zero
indicates expansion in the region's manufacturing.

Some attributed the sharp decline in the index to recent
winter weather, but that did not dispel concerns entirely.

"This number is a disaster," said Douglas Borthwick, a
managing director at Chapdelaine Foreign Exchange. "While
weather may have played a part, it comes on the back of horrible
durable goods, payroll, retail sales and housing" data.

The Philly Fed survey is one of the first monthly indicators
of the health of U.S. manufacturing leading up to the national
report by the Institute for Supply Management.

A separate index from Markit, however, showed factory
activity across the United States accelerated at its quickest
pace in nearly four years in early February, handily beating
expectations in a Reuters poll.

That helped ease some concern in financial markets. Paul
Zemsky, head of asset allocation at ING Investment Management,
said the data may have been impacted by short-term factors but
added "it certainly is a good number."

In China, activity in the vast factory sector fell to a
seven-month low of 48.3 this month from 49.5 in January,
according to the flash Markit/HSBC purchasing managers' index.

Some analysts warned that the recent Lunar New Year holidays
may have affected the result, but the sub-50 reading indicated a
contraction in the sector and reinforced worries that the
world's second largest economy was slowing down. That could have
knock-on effects in emerging markets and the European Union.

"We had poor data from China but the question there is how
impactful the deleveraging will be," Zemsky said. "This would
indicate it is deflating slowly, which is not bad, but they're a
big economy and we need it to grow."

EUROPE AT RISK

The euro zone may have the most to worry about, said Lena
Komileva, economist at G+ Economics.

The economic bloc, she said, "is most at risk of a global
demand shock given the chills emanating from China's
deleveraging across emerging markets, North America's current
'frozen' growth patch and the fact that the U.S. is exporting
less of its growth to the rest of the world."

Markit's Eurozone Composite PMI, which is based on surveys
of thousands of companies and considered a good guide to growth,
dipped to 52.7, below January's 31-month high of 52.9.

A Reuters poll had called for a modest rise.

The overall index masked news France is lagging far behind
its European peers, pouring cold water on hopes for a recovery
there that had gathered momentum after its economy expanded 0.3
percent in the fourth quarter.

"The story behind the euro zone PMIs remains one of an
increasingly fragile recovery under way amid growing divergence
between the union's largest economies, global growth headwinds
and persistent euro strength," Komileva said.

Still, Markit said the latest data point to 0.5 percent
economic growth in the bloc this quarter.

The region still faces falling prices, however, with
inflation dropping unexpectedly to just 0.7 percent in January,

That has increased pressure on the ECB to consider new
policy measures to support a recovery that appears to be running
out of steam.